AND RESULTS OF OPERATIONS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's Condensed Consolidated Statements of Income for the three-month
periods ended March 31, 2020 and 2019 reflect the consolidated operations of the
Company and its subsidiaries.
CECO is a global leader in industrial air quality and fluid handling serving the
energy, industrial and other niche markets through an attractive asset-light
business model. CECO provides innovative technology and application expertise
that helps companies grow their businesses with safe, clean, and more efficient
solutions to help protect our shared environment.
CECO serves diverse industries globally by working to improve air quality,
optimize the energy value chain, and provide customized engineered solutions in
our customer's mission critical applications. The secular growth industries CECO
serves include oil & gas, power generation, water and wastewater, battery
production, poly silicon fabrication, and chemical and petrochemical processing,
along with a wide range of other industries.
COVID-19
On January 30, 2020, the WHO announced a global health emergency because of a
new strain of coronavirus ("COVID-19") originating in Wuhan, China and the risks
to the international community as the virus spreads globally beyond its point of
origin. On March 11, 2020, the WHO characterized COVID-19 as a pandemic. As of
March 31, 2020, the COVID-19 pandemic has had a significant impact on
macroeconomic conditions and the end markets of our business. Several
countries, including the United States, have taken steps to restrict travel,
temporarily close businesses and issue quarantine orders, and it remains unclear
how long such measures will remain in place or whether efforts to contain the
spread of COVID-19 will continue to intensify.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief
and Economic Security Act (the "CARES Act"). The CARES Act, among other things,
includes provisions relating to refundable payroll tax credits, deferment of
employer side social security payments, net operating loss carryback periods,
alternative minimum tax credit refunds, modifications to the net interest
deduction limitations and technical corrections to tax depreciation methods for
qualified improvement property. It is currently unclear if and how the Company
will benefit from the CARES Act in the future, but we continue to examine the
impacts the CARES Act may have on our business, results of operations, financial
condition or liquidity.
Within the United States, certain portions of our business have been designated
an essential business, and we continue to operate our business in compliance
with applicable state and local laws. This allows us to continue to serve our
customers, however, the COVID-19 pandemic has also disrupted our global
operations. The outbreak of COVID-19 has heightened the risk of work stoppages
at our facilities or those of our suppliers. Certain of our facilities and our
suppliers have experienced temporary disruptions as a result of the COVID-19
pandemic, and we cannot predict whether our facilities will experience more
significant disruptions in the future or the impact on our suppliers.
CECO has undertaken necessary measures in compliance with government directives
to remain open across its business and continues to work closely with its global
supply chain to proactively support customers during this critical time. As a
key supplier to critical infrastructure projects, CECO has worked to maintain
ongoing essential operations while observing recommended CDC guidelines to
minimize the risk of spreading the COVID-19 virus including implementing, where
possible, work-from-home procedures and additional sanitization efforts where
facilities remain open to provide necessary services. Additionally, CECO has
taken several proactive cost reduction measures in response to the economic
pressures brought on by the COVID-19 pandemic. The CECO senior management team
has agreed to a temporary salary reduction, certain corporate-level costs have
been eliminated or reduced, and CECO has instituted a rolling 2-week furlough of
United States-based employees during the 6-week period beginning the week of
April 6, 2020.
The impact of the COVID-19 pandemic is fluid and continues to evolve, and
therefore, we cannot currently predict the extent to which our business, results
of operations, financial condition or liquidity will ultimately be impacted.
Note Regarding Use of Non-GAAP Financial Measures
The Company's unaudited condensed consolidated financial statements are prepared
in accordance with accounting principles generally accepted in the United States
("GAAP"). These GAAP financial statements include certain charges the Company
believes are not indicative of its core ongoing operational performance.
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As a result, the Company provides financial information in this Management's
Discussion and Analysis that was not prepared in accordance with GAAP and should
not be considered as an alternative to the information prepared in accordance
with GAAP. The Company provides this supplemental non-GAAP financial information
because the Company's management utilizes it to evaluate its ongoing financial
performance and the Company believes it provides greater transparency to
investors as supplemental information to its GAAP results.
The Company has provided the non-GAAP financial measures of non-GAAP operating
income and non-GAAP operating margin as a result of items that the Company
believes are not indicative of its ongoing operations. These include
transactions associated with the Company's acquisitions, divestitures and the
items described below in "Consolidated Results." The Company believes that
evaluation of its financial performance compared with prior and future periods
can be enhanced by a presentation of results that exclude the impact of these
items. The Company has incurred substantial expense and income associated with
the acquisition and divestitures. While the Company cannot predict the exact
timing or amounts of such charges, it does expect to treat the financial impact
of these transactions as special items in its future presentation of non-GAAP
results.
Results of Operations
Consolidated Results
Our Condensed Consolidated Statements of Income for the three-month periods
ended March 31, 2020 and 2019 are as follows:
Three months ended March 31,
(dollars in millions) 2020 2019
Net sales $ 80.5 $ 86.0
Cost of sales $ 52.2 $ 57.6
Gross profit $ 28.3 $ 28.4
Percent of sales 35.2 % 33.0 %
Selling and administrative expenses 22.0 21.2
Percent of sales 27.3 % 24.7 %
Amortization expenses 1.7 2.2
Restructuring expenses 0.4 -
Loss on divestitures, net of selling costs - 0.1
Operating income $ 4.2 $ 4.9
Operating margin 5.2 % 5.7 %
To compare operating performance between the three-month periods ended March 31,
2020 and 2019, the Company has adjusted GAAP operating income to exclude (1)
amortization expenses for acquisition related intangible assets, (2)
restructuring expenses primarily relating to severance and legal expenses, and
(3) loss on divestitures, net of selling costs necessary to complete the
divestiture such as legal, accounting and compliance. See "Note Regarding Use of
Non-GAAP Financial Measures" above. The following table presents the
reconciliation of GAAP operating income and GAAP operating margin to non-GAAP
operating income and non-GAAP operating margin:
Three months ended March 31,
(dollars in millions) 2020 2019
Operating income as reported in accordance with GAAP $ 4.2 $ 4.9
Operating margin in accordance with GAAP 5.2 % 5.7 %
Amortization expenses 1.7 2.2
Restructuring expenses 0.4 -
Loss on divestitures, net of selling costs - 0.1
Non-GAAP operating income $ 6.3 $ 7.2
Non-GAAP operating margin 7.8 % 8.4 %
Net sales for the first quarter of 2020 decreased $5.5 million, or 6.4%, to
$80.5 million compared with $86.0 million in the first quarter of 2019. The
decrease is primarily attributable to decreases of $5.1 million in
custom-designed cyclone systems and $2.5 million in filtration and pump
solutions, partially offset by increases of $1.9 million of our turbine exhaust
and silencers systems and $0.7 million in clean air pollution control and
ventilation technologies.
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Gross profit decreased $0.1 million, or 0.4%, to $28.3 million in the first
quarter of 2020 compared with $28.4 million in the same period of 2019. Gross
profit as a percentage of sales increased to 35.2% in the first quarter of 2020
compared with 33.0% in the first quarter of 2019 due to product mix.
Orders booked were $75.7 million during the first quarter of 2020 as compared
with $97.3 million during the first quarter of 2019. The decrease is primarily
attributable to decreases in the refinery, midstream oil and gas, and pollution
control end markets, and the COVID-19 slowdown impacting our customers in March
2020.
Selling and administrative expenses were $22.0 million for the first quarter of
2020 compared with $21.2 million for the first quarter of 2019. The increase is
primarily attributable to investments in sales personnel and the final
settlement of a commercial dispute. Selling and administrative expenses
increased as a percentage of sales to 27.3% in the first quarter of 2020
compared with 24.7% in the first quarter of 2019. The increase in selling and
administrative expenses as a percentage of sales is primarily attributable to
sales volume decreases year over year.
Amortization expense was $1.7 million for the first quarter of 2020 compared
with $2.2 million for the first quarter of 2019. The decrease in expense is
attributable $0.5 million decrease in definite lived asset amortization.
Operating income decreased $0.7 million to $4.2 million in the first quarter of
2020 compared with $4.9 million during the first quarter of 2019. The decrease
is attributable to the factors described above.
Non-GAAP operating income was $6.3 million for the first quarter of 2020
compared with $7.2 million for the first quarter of 2019. The decrease in
non-GAAP operating income is primarily attributable to the decline in sales and
increase in selling and administrative expenses, partially offset by the
improvements in gross margin, as described above. Non-GAAP operating income as a
percentage of sales decreased to 7.8% for the first quarter of 2020 from 8.4%
for the first quarter of 2019.
Interest expense decreased to $1.0 million in the first quarter of 2020 compared
with $1.5 million in the first quarter of 2019. The decrease in interest expense
is primarily due to lower interest rates on a negotiated credit agreement which
was executed in June of 2019, and a reduced debt balance for the majority of
three-month period in 2020 compared to 2019. As a proactive measure related to
COVID-19, the Company elected to drawdown $40.0 million from its revolving
credit facility, in late March 2020, which supplements the Company's already
strong cash position.
Income tax expense was $0.8 million for the first quarter of 2020 and 2019. The
effective income tax rate for the first quarter of 2020 was 18.6% compared with
31.1% for first quarter of 2019. The effective income tax rate for the first
quarter of 2020 is lower than the United States federal statutory rate. Our
effective tax rate is affected by certain other permanent differences, including
state income taxes, non-deductible incentive stock-based compensation, the
Global Intangible Low-Taxed Income inclusion and Foreign-Derived Intangible
Income deduction, tax credits, and differences in tax rates among the
jurisdictions in which we operate.
Business Segments
The Company's operations are organized and reviewed by management along its
product lines or end market that the segment serves and are presented in three
reportable segments. The results of the segments are reviewed through "Income
from operations" on the unaudited Condensed Consolidated Statements of Income.
Three months ended March 31,
(dollars in thousands) 2020 2019
Net Sales (less intra- and inter-segment sales)
Energy Solutions Segment $ 50,646 $ 55,188
Industrial Solutions Segment 20,356 18,853
Fluid Handling Solutions Segment 9,484 11,970
Net sales $ 80,486 $ 86,011
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Three months ended March 31,
(dollars in thousands) 2020 2019
Income from Operations
Energy Solutions Segment $ 8,557 $ 9,291
Industrial Solutions Segment 1,473 602
Fluid Handling Solutions Segment 1,623 2,358
Corporate and Other(1) (7,414 ) (7,361 )
Income from operations $ 4,239 $ 4,890
(1) Includes corporate compensation, professional services, information
technology and other general and administrative corporate expenses.
Energy Solutions Segment
Our Energy Solutions segment net sales decreased $4.6 million to $50.6 million
in the first quarter of 2020 compared with $55.2 million in the same period of
2019. The decrease is primarily attributable to decreases of $5.1 million in the
Company's custom-designed cyclone systems that serve the refinery markets period
over period.
Operating income for the Energy Solutions segment decreased $0.7 million to $8.6
million in the first quarter of 2020 compared with $9.3 million in the same
period of 2019. The change is primarily attributable to decrease in sales of
$4.6 million and an increase of $1.0 million in administrative expenses related
to investments in sales personnel, partially offset by a decrease in costs of
sales of $4.5 million and a decrease of $0.3 million in amortization expense.
Industrial Solutions Segment
Our Industrial Solutions segment net sales increased $1.5 million to $20.4
million in the first quarter of 2020 compared with $18.9 million in the first
quarter of 2019. The increase is primarily attributable to increased sales in
the Company's clean air pollution control and ventilation technologies.
Operating income for the Industrial Solutions segment increased $0.9 million to
$1.5 million in the first quarter of 2020 compared with $0.6 million in the
first quarter of 2019. The increase is primarily attributable to a $0.5 million
increase in gross profit driven by increased sales and a $0.5 million decrease
in selling and marketing expenses.
Fluid Handling Solutions Segment
Our Fluid Handling Solutions segment net sales decreased $2.5 million to $9.5
million in the first quarter of 2020 compared with $12.0 million in the first
quarter of 2019. The decrease is primarily attributable to decreases in the
Company's filtration and pump solutions.
Operating income for the Fluid Handling Solutions segment decreased $0.8 million
to $1.6 million in the first quarter of 2020 compared with $2.4 million in the
first quarter of 2019. The decrease is primarily attributable to a $1.0 million
decrease in gross profit due to decrease in sales, partially offset by $0.1
million decrease in amortization expense.
Corporate and Other Segment
Operating expense for the Corporate and Other segment remained flat period over
period at $7.4 million in the first quarter of 2020 and 2019, respectively.
Backlog
Backlog (i.e., unfulfilled or remaining performance obligations) represents the
sales we expect to recognize for our products and services for which control has
not yet transferred to the customer. Backlog decreased to $208.9 million as of
March 31, 2020 from $216.6 million as of December 31, 2019. Our customers may
have the right to cancel a given order. Historically cancellations have not been
common. Backlog is adjusted on a quarterly basis for adjustments in foreign
currency exchange rates. Substantially all backlog is expected to be delivered
within 12 to 18 months. Backlog is not defined by United States generally
accepted accounting principles ("GAAP") and our methodology for calculating
backlog may not be consistent with methodologies used by other companies.
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New Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2 to the
unaudited condensed consolidated financial statements within Item 1 of this
Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flow from operations and available
borrowings under our Credit Facility (as defined below). Our principal uses of
cash are operating costs, payment of principal and interest on our outstanding
debt, working capital and other corporate requirements.
When we undertake large jobs, our working capital objective is to make these
projects self-funding. We work to achieve this by obtaining initial down
payments, progress billing contracts, utilizing extended payment terms from
material suppliers when possible, and paying sub-contractors after payment from
our customers, which is an industry practice. Our investment in net working
capital is funded by cash flow from operations and by our revolving line of
credit.
At March 31, 2020, the Company had working capital of $109.9 million, compared
with $64.3 million at December 31, 2019. The ratio of current assets to current
liabilities was 2.01 to 1.00 on March 31, 2020, as compared with a ratio of 1.56
to 1.00 at December 31, 2019. The increase to the Company's working capital is
primarily attributable to the drawdown of $40.0 million from its revolving
credit facility, a proactive measure related to COVID-19, which supplements
the Company's already strong cash position.
At March 31, 2020 and December 31, 2019, cash and cash equivalents totaled $82.5
million and $35.6 million, respectively. As of March 31, 2020 and December 31,
2019, $29.8 million and $27.0 million, respectively, of our cash and cash
equivalents were held by certain non- United States subsidiaries, as well as
being denominated in foreign currencies.
Debt consisted of the following:
(table only in thousands) March 31, 2020 December 31, 2019
Outstanding borrowings under the Credit Facility
(defined below).
Term loan payable in quarterly principal
installments of $0.6 million
through June 2021, $0.9 million through June 2023,
and $1.3 million
thereafter with balance due upon maturity in June
2024.
- Term loan $ 48,125 $ 48,750
- Revolving Credit Loan 61,500 18,500
- Unamortized debt discount (1,644 ) (1,749 )
Total outstanding borrowings under Credit Facility $ 107,981 $ 65,501
Less: current portion (2,500 ) (2,500 )
Total debt, less current portion $ 105,481 $ 63,001
Credit Facility
The Company's outstanding borrowings in the United States consist of senior
secured term loan and a senior secured revolver loan with sub-facilities for
letters of credit, swing-line loans and multi-currency loans (collectively, the
"Credit Facility"). As of March 31, 2020 and December 31, 2019, the Company was
in compliance with all related financial and other restrictive covenants under
the Credit Facility.
See Note 7 to the unaudited condensed consolidated financial statements within
Item 1 of this Quarterly Report on Form 10-Q for further information on the
Company's debt facilities.
Total unused credit availability under our existing Credit Facility is as
follows:
(dollars in millions) March 31, 2020 December 31, 2019
Credit Facility, revolving loans $ 140.0 $ 140.0
Draw down (61.5 ) (18.5 )
Letters of credit open (7.4 ) (11.0 )
Total unused credit availability $ 71.1 $ 110.5
Amount available based on borrowing limitations $ 71.1 $ 82.3
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Overview of Cash Flows and Liquidity
For the three months ended March 31,
(dollars in thousands) 2020 2019
Net cash provided by (used in) operating
activities $ 7,001 $ (13,741 )
Net cash used in investing activities (976 ) (423 )
Net cash provided by (used in) financing
activities 42,250 (1,816 )
Effect of exchange rate changes on cash and cash
equivalents (1,127 ) 447
Net increase (decrease) in cash $ 47,148 $ (15,533 )
Operating Activities
For the three-months ended March 31, 2020, $7.0 million of cash was provided by
operating activities compared with $(13.7) million used in operating activities
in the prior year period, a $20.7 million increase. Cash flow from operating
activities in the first quarter of 2020 had a favorable impact year-over-year
primarily due to certain decreases in net working capital items such accounts
receivable and inventory offset by increases in prepaid expenses and costs and
estimated earnings in excess of billings as reflected in the Condensed
Consolidated Statements of Cash Flows.
Investing Activities
For the three-months ended March 31, 2020, net cash used in investing
activities, attributed to the acquisition of property and equipment, was $1.0
million compared with $0.4 million in the prior year period.
Financing Activities
For the three-months ended March 31, 2020, $42.3 million was provided by
financing activities compared with $(1.8) million used in financing activities
in the period year period, an increase of $44.1 million. As a proactive
measure, related to COVID-19, the Company elected to drawdown $40.0 million from
its revolving credit facility, which supplements the Company's already strong
cash position. Additionally, for the first three-months ended March 31, 2020,
$(0.6) million was used in financing activities for repayments on the Company's
Term loan compared with $(1.7) million for repayments on the Company's note
payable in the first three-months of 2019.
Critical Accounting Policies and Estimates
Management's discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's condensed consolidated
financial statements. The preparation of these financial statements requires
management to make estimates and assumptions about future events. These
estimates and the underlying assumptions affect the amounts of assets and
liabilities reported, disclosures about contingent assets and liabilities and
reported amounts of revenues and expenses. Such estimates include revenue
recognition, the valuation of trade receivables, inventories, goodwill,
intangible assets, other long-lived assets, legal contingencies, guarantee
obligations and assumptions used in the calculation of income taxes, assumptions
used in business combination accounting and related balances, and pension and
post-retirement benefits, among others. These estimates and assumptions are
based on management's best estimates and judgment. Management evaluates its
estimates and assumptions on an ongoing basis using historical experience and
other factors. Management monitors the economic conditions and other factors and
will adjust such estimates and assumptions when facts and circumstances dictate.
As future events and their effects cannot be determined with precision, actual
results could differ significantly from these estimates.
Management believes there have been no changes during the three-month period
ended March 31, 2020, other than disclosed in Note 2 to the condensed
consolidated financial statements within Item 1 of this quarterly Report on Form
10-Q, to the items that the Company disclosed as its critical accounting
policies and estimates in Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's Annual Report on Form 10-K
for the year ended December 31, 2019.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of the Securities Act of 1933 (the "Securities Act") and the
Securities Exchange Act of 1934 (the "Exchange Act") which are intended to be
covered by the safe harbor for "forward-looking statements" provided by the
Private Securities Litigation Reform Act of 1995. Any statements other than
statements of historical fact, including statements regarding industry prospects
or future results of operations or financial position made in this Quarterly
Report on Form 10-Q are forward-looking statements and should be evaluated as
such. These statements are made on the basis of management's views and
assumptions regarding future events and business performance. We use words such
as
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"believe," "expect," "anticipate," "intends," "estimate," "forecast," "project,"
"will," "plan," "should" and similar expressions to identify forward-looking
statements. Forward-looking statements involve risks and uncertainties that may
cause actual results to differ materially from any future results, performance
or achievements expressed or implied by such statements. Potential risks and
uncertainties, among others, that could cause actual results to differ
materially are discussed under "Part I - Item 1A. Risk Factors" of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and "Part
II - Item 1.A. Risk Factors" of this Quarterly Report on Form 10-Q for the
quarter ended March 31, 2020, and include, but are not limited to: the
sensitivity of our business to economic and financial market conditions
generally and economic conditions in CECO's service areas; dependence on fixed
price contracts and the risks associated therewith, including actual costs
exceeding estimates and method of accounting for revenue; the effect of growth
on CECO's infrastructure, resources, and existing sales; the ability to expand
operations in both new and existing markets; the potential for contract delay or
cancellation; liabilities arising from faulty services or products that
could result in significant professional or product liability, warranty, or
other claims; changes in or developments with respect to any litigation or
investigation; failure to meet timely completion or performance standards that
could result in higher cost and reduced profits or, in some cases, losses on
projects; the potential for fluctuations in prices for manufactured components
and raw materials, including as a result of tariffs and surcharges; the
substantial amount of debt incurred in connection with our acquisitions and our
ability to repay or refinance it or incur additional debt in the future; the
impact of federal, state or local government regulations; economic and political
conditions generally; our ability to successfully realize the expected benefits
of our restructuring program; our ability to successfully integrate acquired
businesses and realize the synergies from acquisitions; unpredictability and
severity of catastrophic events, including cyber security threats, acts of
terrorism or outbreak of war or hostilities or public health crises, such as
uncertainties regarding the extent and duration of impacts of matters associated
with the novel coronavirus ("COVID-19"), as well as management's response to any
of the aforementioned factors. Many of these risks are beyond management's
ability to control or predict. Should one or more of these risks or
uncertainties materialize, or should the assumptions prove incorrect, actual
results may vary in material aspects from those currently anticipated. Investors
are cautioned not to place undue reliance on such forward-looking statements as
they speak only to our views as of the date the statement is made. Furthermore,
forward-looking statements speak only as of the date they are made. Except as
required under the federal securities laws or the rules and regulations of the
SEC, we undertake no obligation to update or review any forward-looking
statements, whether as a result of new information, future events or otherwise.
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